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Will Higher Physical Demand For Silver Drive Up SLV?

Summary The physical demand for silver has declined in 2014. Even if the demand were to pick up, the price of SLV may keep going down in 2015. The ratio of SLV to GLD gone up in 2014, which means SLV didn’t perform well compared to GLD. This year, the iShares Silver Trust ETF (NYSEARCA: SLV ) didn’t perform well as its price dropped by 18%. The low inflation, the FOMC’s change in policy and the drop in the price of gold contributed to the weakness of silver. Looking forward, even if the physical demand for silver were to pick up, it’s not likely to turn SLV back up. Let’s see why. Physical demand – does it matter? One of the main issues that bullion bulls point out is the changes in the demand for silver that could have an impact on the price of silver and SLV. But I think the changes in the physical demand played a secondary role on the price of SLV in recent years. The chart below presents the changes in demand for silver over the past decade and the average annual price of silver. Source of data Silver Institute and Reuters As you can see, the physical demand for silver seems to have limited impact on the price of SLV in the past few years especially. Back in 2008 the demand for silver reached its highest level in years, and SLV rose over $20, only to fall back by the end of the year to below $9 – so there was a reaction but it didn’t lead to staggering rise in SLV prices. Moreover, the spike in SLV prices during 2011-2012 doesn’t seem to relate to the changes in physical demand for the precious metal. During those years the demand didn’t increase compared to previous years. I also checked the changes in supply during those years — there was no a major shortage for silver on an annual scale more than in previous years. Conversely, even though the demand for silver grew in 2013, the price of SLV came down from its high levels of 2011-2012. Looking forward, HSBC still predicts higher demand for silver in 2015. This is why it retains its forecast price of silver at $17.65 per ounce. China, the world’s largest consumer of silver, will face economic challenges in 2015 – this could suggest China’s demand for silver may not increase any faster than it did in 2014. So the expected rise in physical demand may be harder to achieve next year. The other side of this equation is the changes in supply. In the past decade the supply, which mostly comes from mines, grew at a steady pace. This could change in 2015 as silver producers, which got use to the elevated price of silver over recent years, may taper down their output now that silver prices don’t provide a positive ROI for some of their mines. Such a shift, however, could take time to be reflected silver prices. And in any case, this is likely to be the secondary factor to impact SLV. The main issue is likely to be the changes in the demand for silver on paper, which is mostly driven by silver’s relation to gold, U.S. inflation expectations and treasuries yields. Let’s examine the first two. The issue related to treasuries yield you can see in this past post . This year, SLV has underperformed SPDR Gold Trust (NYSEARCA: GLD ). The relation between the two tended to be very strong and positive for the most part. Source of data: Google finance If GLD continues to remain flat or even slowly comes down, this likely to also bring down the price of SLV. The changes in U.S. inflation also tended to drive higher the price of SLV. The last time the U.S. inflation grew to over 10% was at beginning of the 1980. During that period, the price of silver spiked to around $48 for a very short time before it came back down along with the U.S. inflation. Back then, however, the story behind that spike and crash, which is known as Silver Thursday , was related to the Hunt bothers attempt to corner the silver market. But the rally of silver came even before the Hunt bothers tried to corner the market. Also, gold had a similar rise and fall in the early 80’s. The chart below presents the changes in U.S. core inflation (percent changes from a year back) and price of silver between 1978 and 1998. Source of data: FRED and Bloomberg In the past two decades, however, the U.S. inflation remained relatively flat – below 3%. But silver grew fast in 2011-2012. During those years, although the U.S. inflation remained low, the expectations for a sudden spike in inflation by bullion bulls were high. This is mainly due the FOMC’s policy of implementing its quantitative easing programs in low interest rates environment. Source of data: FRED and Bloomberg In the past few weeks the demand for SLV kept falling down: As of the end of last week, this ETF’s silver holdings have declined by 4% in the last two months. If the demand for silver for investment purposes continues to decrease, this is likely to bring down SLV. The potential fall in supply and expectations for a rise in physical demand may curb down the fall in SLV prices in 2015. But there are other factors that are likely to keep dragging down SLV: As the memories of the Fed’s QE programs remain in the rear view mirror, it becomes harder to see a sudden rise in inflation any time soon. Finally, if gold remains low and inflation doesn’t pick up, SLV isn’t likely to make a comeback in 2015.

Top ETF Stories Of 2014 Worth Watching In 2015

The stock market across the globe has given mixed performances in 2014. While the Dow Jones Industrial Average crossed the 18,000 mark for the first time in mid December and the S&P 500 is on the verge of crossing the 2,100 level on the back of an accelerating job market and improving economic fundamentals, a number of international economies have either slipped into recession or are struggling to reignite growth. In particular, several events will likely spill over into 2015 and continue to impact the ETF world either in a positive or a negative way. Below, we have highlighted some of these events, which will hog investor attention in the New Year: Oil/Energy ETFs The broad energy space hit headlines all year round as oil price jumped to a fresh high in mid June and then took a reverse turn slipping to a multi-year low in December. While geopolitical tensions in Russia and insurgency in Iraq propelled the oil prices and the energy ETFs higher in the first half of the year, rising U.S. shale oil production, abundant supply, slowing global demand, no cut in OPEC output, and a strong dollar pushed them to lower levels in recent months. Whether the bear will continue to chase the energy space or will it turn around in 2015? This is THE question everywhere in the world. However, oil price is showing some strength in today’s trading session on concerns over the Libyan supply disruption. As a result, investors should definitely keep a close eye on ETFs that will largely be impacted by this development. In particular, the First Trust ISE-Revere Natural Gas Index Fund (FCG ) , SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA: XOP ) , Market Vectors Oil Services ETF (NYSEARCA: OIH ) , United States Oil Fund (NYSEARCA: USO ) and United States Brent Oil Fund (NYSEARCA: BNO ) are some of the funds that could see huge volatility. FCG, having a Zacks ETF Rank of 5 or ‘Strong Sell’ rating, has stolen the show this year, plunging 41.2% while XOP and OIH lost about 28% and 24.2%, respectively and have a Zacks ETF Rank of 4 or ‘Sell’ rating. The future-based oil ETFs – BNO and USO – declined 47.8% and 41.7%, respectively. Russia ETFs Russian ETFs have seen horrendous trading this year thanks to several rounds of Western sanctions imposed on the country for invading Ukraine and the oil price collapse. The Russian ruble also saw a terrible decline against the greenback, losing about 50% since June. To combat the slide in the currency and reinvigorate growth, the Russian central bank has taken various measures. While direct currency intervention, minor rate hikes, and tightening supplies of the ruble did not bear any fruit, the central bank took a bold step this month by raising key interest rates rate from 10.5% to 17%, representing the steepest one-time hike in 16 years. The ruble has recovered slightly after the move but Russian economic growth still remains gloomy due to limited opportunities for investment, declining oil prices, rising inflation, weak deposit growth, soft earnings, falling consumer confidence and lack of growth drivers. Given this, Russia ETFs remained in investors’ eyes in the emerging/European market space in 2015. There are currently four non-leveraged ETFs targeting the Russian stocks – the Market Vectors Russia ETF (NYSEARCA: RSX ) , iShares MSCI Russia Capped ETF (NYSEARCA: ERUS ) , Market Vectors Russia Small-Cap ETF (NYSEARCA: RSXJ ) , and SPDR S&P Russia (NYSEARCA: RBL ) . All the products currently have a Zacks ETF Rank of 5 and are down in the range of 40-50% this year. U.S. Treasury ETFs While short-term Treasury ETFs have stayed almost flat this year, long-term products are leading the space. This trend is unlikely to continue next year as the Fed is on track to raise interest rates given a strengthening U.S. economy. Some market experts expect the first interest rate hike since 2006 sooner than expected in mid 2015, resulting in aggressive higher yields since 2009. According to the Wall Street message , 2015 would be disastrous for U.S. government bonds. In fact, the short end of the yield curve is rising faster than the long end and the spread between the 5-year and 30-year yields tightened to 109 bps from 220 bps at the start of the year, indicating that the yield curve is plateauing. As such, investors should take great precaution while trading in government bonds in the coming months. The three most popular Treasury funds – iShares 1-3 Year Treasury Bond ETF (NYSEARCA: SHY ) , iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ) and iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) are up 0%, 6.20%, and 22.14%, respectively. All these products have a Zacks ETF Rank of 3 or ‘Hold’ rating. SHY targets short end of the yield curve while IEF and TLT focus on mid-term and long-term government bonds, respectively. Bottom Line Investors should closely watch the developments in these spaces as we head into the next year and should tap opportunities as and when they come.

Latest Low Carbon ETF Sees Huge Popularity Out Of The Gate

The ETF world is becoming increasingly competitive as issuers continue to line up new products to entice investors. While most try to please investors by charging low expense ratios, others have even attempted product charging a zero percent management fee. In this cutthroat competitive world, iShares has recently launched a product based on the low carbon emission idea. The newly launched iShares MSCI ACWI Low Carbon Target ETF (NYSEARCA: CRBN ) comes close on the heels of the recently launched SPDR MSCI ACWI Low Carbon Target ETF (NYSEARCA: LOWC ) by State Street. Though the two new funds are hardly distinguishable from each other and both look to provide exposure to companies with lower carbon and greenhouse gas emissions, below we have highlighted some of the details of the latest product on the block. CRBN in Focus The newly launched ETF tracks the MSCI ACWI Low Carbon Target Index to provide exposure to developed and emerging market equities with a lower carbon exposure than that of the broad market. For this purpose, the index goes overweight in companies with low carbon emissions relative to sales and per dollar of market capitalization. Also, the index supports companies that are less dependent on fossil fuels. This strategy results in the fund holding a well-diversified basket of 956 stocks. Apple occupies the top position with 1.82% exposure, followed by Microsoft (NASDAQ: MSFT ) (1.04%) and Johnson and Johnson (NYSE: JNJ ) (0.87%). Sector-wise, Financials dominates the fund with a little less than one-fourth exposure, followed by Information Technology with 13.7% allocation and Industrials with 11.7% exposure. Geographically, the U.S. takes the biggest chunk with half of the assets invested in it. This is followed by Japan (7.5%), U.K. (6.6%) and Canada (3.5%). The fund charges 20 bps in fees, including waivers. How Does it Fit in a Portfolio? The fund is a great choice for long-term investors, especially institutions looking to invest in a way that can have a positive impact on the broader economy. The impact of climate change worldwide and the detrimental consequences of the presence of greenhouse gases in the environment have become an important topic of discussion lately. People these days are more focused on socially responsible investing and the new fund is a good platform for them to do so. ETF Competition Though the socially responsible investing space has a lot of funds focusing on companies that are socially accountable, the focus on funds targeting low carbon emission companies is still quite low. However, the iPath Global Carbon ETN (NYSEARCA: GRN ) is one such product which focuses on this space. The fund tracks the Barclays Capital Global Carbon Index Total Return, which measures the performance of the most highly traded carbon-related credit plans. The ETN is, however, quite unpopular and illiquid with an asset base of under $3 million and an average volume of 4,000 shares a day. The product is also quite expensive as compared with the newly launched product and charges 75 basis points as fees. Apart from GRN, the newly launched CRBN is likely to face competition from another recently launched fund by State Street’s LOWC, as it also tracks the same index and charges the same fees. With that being said, CRBN has already established its popularity in just a few days of its launch and is presently the most successful ETF launch, by assets, since October, as per research firm XTF . CRBN has gathered roughly $137.8 million in assets since its inception on December 8 this month, while LOWC has managed to garner $71.13 million after its launch on November 25. This clearly indicates that CRBN is already winning in terms of popularity and might have great days ahead as well.